August 23, 2009

 

What will Gold do?

 

The truth is, I do have a very definite opinion on Gold (outlined briefly below) but the real emphasis of this newsletter is to point out a few potentially profitable situations in which I think you do not need any opinion whatsoever as to what direction you expect these markets to move. The two markets addressed here have been in ABNORMALLY long consolidations and I believe the odds therefore very much favor a fairly large move, one way or the other, in both of them, within the next 3-4 months. With this in mind, I believe an options strategy of buying equal numbers of both calls and puts in these markets has an excellent chance of generating 30%-50% returns on investment between now and the end of 2009. While 30%-50% on your money certainly sounds attractive to just about anyone, it goes without saying that if these markets continue to go sideways, you could also lose everything you have on the table...Nevertheless, as futures are inherently volatile, in my judgment, both of the ideas presented here make tremendous sense...Futures do not go sideways forever.

 

My own feeling is Gold could be at $600 an ounce in no time at all. In reality, this market very much reminds me of the early 1980's following its first shot at $1000 an ounce (generated by the 1970's oil shock). That bull market topped out in January, 1980, and then spent the next 2 1/2 years falling as low as $300 an ounce, all the while accompanied by tons of expert analysis touting hyperinflation and suggesting $1500 was the next stop...which is pretty much the same thing I am now hearing everywhere, whether it be from Wall Street or those radio and TV ads that are all over the place...Aside from my belief that inflation is not even remotely on the horizon (I KNOW there are multitude of talking heads making the seemingly logical, but basically incorrect, argument, that government spending automatically will result in wages and prices zooming forever upward), nor that the world financial system is on the verge of collapse (and I would also note that when there really was a fear of a meltdown last year, even then, Gold, supposedly the great hedge against Armageddon, could not even make a new high), I'll make the very simple observation that, "Popular Ideas Tend to Lose Money"...And I believe Gold, which doesn't earn a dime in interest, and ONLY is a good investment if it's going up (which it already has done by QUADRUPLING in value) is the epitome of one of those very popular, but very BAD ideas...a little like investing in the hot Real Estate or the stock markets a few years back...Maybe I'm dead wrong, but there is no size straight down drop that would surprise me in this market.

 

But my opinion is irrelevant to what I am recommending here. This idea has more to do with math than opinion, so the first thing I'll present is a chart of what Gold has been doing for the past few years and have you just look at the magnitude of the numerous $100+ swings, up and down, that have been taking place on an almost routine basis...Take a good look at the numbers, and then, with Gold sitting here roughly $50 under its all time highs, in these extremely volatile markets, ask yourself if it the odds don't imminently favor a big move, one way or the other...

 

 

If you do think the idea of now betting on a dynamic move makes sense, the next chart will give you a good idea of what the math (and $'so) would look like...

 

What I'm recommending is the purchase of what is known as an option straddle...You buy equal numbers of calls and puts, with your bet then being only that the market will move decidedly in either direction. If it does do so, you then will be looking to sell either all of the options at some percentage total gain, or perhaps sell the winning side and keep the losers in hopes of a reversal in the opposite direction, or maybe even just sell the winning side when has returned 100% of your original investment and then own the "losing" side for free, again, in hopes the market will reverse one more time...

 

 

For more perspective, here's a long term look at it...

 

 

OR, if you do have an opinion, you can also take these numbers and do our typical "2 and 1" in whatever direction you think Gold is going...For many reasons, I think this market is actually ready for a $200-$300 move, but in the interest of brevity, I'll leave those reasons for another time...as the main point of this newsletter is that what I think is irrelevant in this situation anyway.

 

And here is the Soybean Oil...You know I am bearish but

what I think doesn't matter in this market either...

 

The Soybean complex has now been sideways for approximately 11 months...This is NOT the norm and I VERY strongly believe we are about to see a dynamic move up or down...

 

You've seen plenty of what I think in market so I'll pretty much just stick to the numbers...Again, the idea is to buy equal numbers of calls and puts and see what happens during the next 4 months...

 

 

 

Give me a call if you're interested...

 

Thanks,

Bill

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